Efficient estimation of factor models with time and cross-sectional dependence (replication data) ...

This paper studies the efficient estimation of large-dimensional factor models with both time and cross-sectional dependence assuming (N,T) separability of the covariance matrix. The asymptotic distribution of the estimator of the factor and factor-loading space under factor stationarity is derived and compared to that of the principal component (PC) estimator. The paper also considers the case when factors exhibit a unit root. We provide feasible estimators and show in a simulation study that they are more efficient than the PC estimator in finite samples. In application, the estimation proce... Mehr ...